2.10 Query: Issues relating to section 32AB of the Income-tax Act, 1961.
1. A public limited company is a large manufacturer and marketer of chemical fertilizers, namely, urea, di-ammonium phosphate and complex fertilizers. All its manufacturing facilities are situated in the State of Goa. Its annual turnover is around Rs. 200 crores.
2. The querist has referred the following issues for the opinion of the Expert Advisory Committee:
(a) Would the incurring of erection charges, installation charges, fabrication charges and engineering service charges relating to specified machinery be considered as “purchase” of machinery etc., as contemplated in section 32AB?
According to the quirest, para 6.9 of the Guidance Note on Audit under Section 32AB of Income-tax Act, merely says that there can be two opinions about the eligibility for deduction under section 32AB. What would be the criteria to determine eligibility in such cases?
(b) In the above referred para 6.9 of the Guidance Note it has been clarified that customs, excise and other duty, freight, commission, brokerage etc. paid for purchase of specified machinery can be considered as amount utilised for purchase. Would amounts withdrawn from the Deposit Account for payment of customs duty etc., also be considered as amounts utilised for purchase and satisfy the requirements of para 9 of the scheme? In para 22.3 of the Guidance Note, reference is made to para 6.6 only, regarding meaning of “purchase” and not to para 6.9 of the Guidance Note wherein customs duty etc., have been dealt with.
(c) Would any disclosure be required in Form 3AA in case of (a) and (b) above? If, yes, in what manner?
(d) Can withdrawals from the Deposit Account be made for the purpose of making a pre-payment of a term loan (within three years of having taken the loan) for purchase of capital equipment, obtained from IDBI, contracted after 31.3.86?
Though the loan is taken for a period of more than three years, one of the clauses in the loan agreement permits such pre-payment.
Would such pre-payment be treated as “utilisation”? Could it be held that, there being a provision for pre-payment, the loan was not taken for a period of more than three years as required under the scheme?
Opinion June 12, 1991
1. The Committee notes paragraphs 6.6, 6.7, 6.9, 22.2 and 22.3 of the ‘Guidance Note on Audit under section 32AB of the Income-tax Act’ issued by the Institute of Chartered Accountants of India which are reproduced below:
“6.6 The requirement of utilising the amount ‘for the purchase’ of specified machinery should be construed in a broad manner. It is not necessary that the assessee should become owner of the specified machinery during the previous year. It is also not necessary that the specified machinery should be installed or put to use during the previous year. If the assessee has placed an order for purchase of the specified machinery and given an advance to the supplier it can be said that the amount has been utilised for the purchase of the said machinery. The delivery of the machinery may be taken in a subsequent year. When the balance price is paid in a subsequent year it will be considered that the assessee has utilised the balance amount for purchase of the machinery in the said year. If the terms of purchase provide for the payment of purchase /price in installment, the assessee can claim the amount paid towards these installments as utilisation of amount for the purchase of the said machinery. In other words, the concept of utilisation of the amount for purchase has to be understood with reference to actual payment made to the supplier from time to time and not with reference to the liability created for the purchase under the mercantile system of accounting. Therefore, even if the account of the supplier is credited with the total price of the machinery and corresponding debit is given to the machinery account the deduction under Section 32AB can be claimed only in respect of the actual payment made to the supplier in each accounting year.
6.7 The assessee can utilise the amount of profit from eligible business or profession for repayment of the principal amount of term loans contracted after 31.3.1986 and taken for a period of three years or more from a Financial Institution which is engaged in providing long-term finance for industrial development in India or from a scheduled bank or from such other institution as the Central Government may by notification specify. This facility of repayment of term loans does not apply in respect of loans taken from other sources (e.g. debentures and long term borrowings from other sources in the private sector).
6.9 The term “purchase” signifies the transaction of purchase by the assessee from another person. Therefore, a question may arise as to whether purchase of raw materials, components and parts by the assessee for erection or manufacture of the specified machinery in his factory can be considered as purchase of the machinery. There can be two opinions about the eligibility for deduction in respect of cost of such machinery under Section 32AB. Similarly, there can be two opinions also with regard to the expenditure incurred by the assessee for installation of any specified machinery purchased by the assessee. However, customs, excise and other duty, freight, commission, brokerage etc. paid for purchase of specified machinery can be considered as amount utilised for purchase.
22.2 According to the letter of guarantee to be given by the Scheduled Bank to IDBI the assessee can operate the Designated account only for the purposes of the scheme. The payment to the supplier of machinery or for repayment of terms loans in accordance with the Scheme will be made by Banker’s cheque directly. Therefore, the auditor can verify the details of payments made out of the Designated account and also verify Bills, Receipts and other documents for the purpose of giving information against this item.
22.3 What is the meaning of the term ‘purchase’ and what payments for purchase of specified machinery are covered by Section 32AB have been discussed in Para 6.6 of this guidance note. It is significant to note that Para 9(1) of the scheme and Para 9 of the statement of particulars do not make any distinction between purchase of specified machinery and other machinery or plant mentioned in section 32AB (4). The auditor should give particulars of machinery or plant purchased out of the withdrawals from Deposit account with IDBI. In particular, the auditor should specifically state the amount utilised for purchase of machinery or plant mentioned in section 32AB(4) because such utilisation will not qualify for deduction under section 32AB. Information about such utilisation may be given against this item or against item10 below.”
2.The Committee notes that section 32AB and the scheme thereunder stipulate the utilisation of the amount for ‘purchase’ of specified assets and not for ‘acquisition’ of specified assets. Had the term ‘acquisition’ been used in the section, the installation and erection charges, fabrication charges and engineering service charges relating to the specified assets would have been included for determining the amount utilised for acquisition. The Committee is of the view that, these charges can still be included in the amount utilised for purchase if they are paid to the supplier as an overall consideration for purchase of the specified assets. The Committee is also of the view that customs, excise and other duty, freight, commission etc. paid for purchase of specified assets can be considered as amount utilised for purchase.
3. The Committee also notes that Rule 9(1) (iii) of the Investment Deposit Account Scheme, 1986, states, inter alia:
“Repayment of the principal amount of term loans contracted after the 31st March, 1986, and taken for a period of three years or more from a financial corporation which is engaged in ………..”
The Committee is of the view that the above rule requires that the loan should be taken for a period of three years or more and does not further require that the loan should be outstanding for a period of three years or more. 4. The Committee is of the following opinion in respect of the issues raised in para 2 of the query:
(a) The expenditure on erection charges, installation charges, fabrication charges and engineering service charges relating to specified machinery can not ordinarily be considered as amount utilised for purchase of specified machinery for the purposes of section 32AB. However, the same can be treated as amounts utilised for purchase of specified machinery if these charges are paid to the supplier of the machinery as an overall consideration for purchase.
(b) Amounts withdrawn from the deposit account for payment of customs, excise and any other duty, freight, commission, brokerage, etc., for the purchase of specified machinery, can be considered as amount utilised for purchase in accordance with the scheme.
(c) No disclosure is required in Form 3AA in case of (a) and (b) above.
(d) If the agreement of loan clearly stipulates that the loan has been contracted for a period of three years or more, the prepayment of such loan can be regarded as “utilisation” for the purpose of section 32AB. Withdrawal from the Deposit Account can be made for making payment of such loan. ________________________
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